APPENDIX B Overview of Activity-Based Funding Activity-Based Funding (ABF) is a management accounting control tool used by govemment agencies to monitor, manage, and administer the funding of health care provisions by govemment hospitals. As well as being used to motivate efficiency, ABF provides increased transparency in the funding of service providers. Use of this tool can help to increase efficiency, improve quality, ensure the fair allocation of resources (or funding) within each healthcare facility and across geographical areas, and improve transparency of hospital funding, activity, and management. It is based on standard costs for patient-related treatment (the "activity"). Funding models are tailored by govemments to ensure that hospital funds are based he St George Hospital 1 is one of the oldest metropolitan hospitals in the region. It is a leading teaching hospital with three main campuses. In addition to pediatrics (babies and children) and obstetrics (childbirth), St George Hospital offers a broad range of comprehensive medical and surgical care to nearly 120,000 patients per quarter. Patient volumes include patients who are treated in the emergency department, admitted to the hospital, given same-day care, and those who are treated in outpatient clinics. Funding for public hospitals like St George comes primarily from taxpayers. Because of the need to preserve and demonstrate proper stewardship of the tax money, it is vitally important to track the performance of entities receiving this type of funding. The government treats hospitals, like St George, as engineered cost centers-meaning that the standard input volumes and prices for the treatment of patients are directly linked to the output activity (payment for that treatment). The hospital receives funds from the govemment funding agency for an agreed-upon level of patient throughput. Payments are capped to prevent over-servicing (over-treatment of patients) and budgetary blowouts. The government has the discretion of offering additional funds for treatment if waiting lists for certain patient conditions increase, or if there is capacity in their budget to pay for additional care. However, for individual hospitals like St George, funding is based on standard costs, even if their own actual costs go up during the contracted period. TABLE 2 St George Hospital Orthopedic Unit Budget (WACU/\$) (in Thousands, except for WACUs Patient Volumes) about these wait times, as they adversely affect some of the key performance indicators shown in Appendix A. The Director of Orthopedics explained that the unit is allocated regular time in the operating room, which enables them to conduct, on average, approximately 10 hip replacements per week and 40 arthroscopies per week. The Director of Orthopedics indicated that while some arthroscopy patients go home the same day, others require a bed overnight. Hip replacement patients stay in the hospital for 3 or 4 days before going to a rehabilitation unit or facility. Vera also spoke with the Director of the Operating Rooms (OR) who told her that they try to run the OR at 90 percent capacity, which allows for additional cases or emergencies. Sometimes it is necessary to operate outside of regular scheduled hours, when funds and clinical capacity allow. Vera was aware that the government could possibly release more funds to reduce hospital waiting lists, but was not sure of the impact this would have on St George Hospital's surgical capacity. Vera was provided with this year's Orthopedic Unit budget and the recent actual results for performance comparisons associated with their two important DRGs: hips (replacements) and knees (arthroscopies). This information is provided in Table 2. Above-average financial performance means the hospital can treat more than the budgeted patient volume, which would be seen as a benefit to society, but only if quality of care is not compromised. Table 2 highlights that overall budgeted income for the Orthopedic Unit was $1,223, meaning that they anticipate being able to undertake the same activity for less than the average price paid by government. While the actual income is lower than anticipated, actual volumes were higher than anticipated, which requires further investigation to determine whether the hospital received additional funds for these two DRGs, or if they treated more patients to keep waiting lists down. Even though they still eamed \$254 net income from the two DRGs, Vera and the Orthopedic Unit management team do not know the overall impact of patient volume on the actual income eamed. Table 2 provided Vera and the Director of Orthopedics with the data to analyze, in more detail, the efficiency and effectiveness of the unit in meeting patient treatment targets. Vera found out that the actual total patient volume for the combined hips and knees across all major service providers was 47,000 WACUs. She also knew that St George's share of the budgeted patient volume is 12 percent. This market data allowed her to compare St George Hospital's Orthopedic Unit performance with other hospital service providers in the government funded region. Using this data, Vera prepared a flexible budget in which to analyze patient volume, price, and cost variances. The Director wanted this information to confirm whether the Unit is performing better than the average activity costs for the additional volume treated and whether they can potentially treat more patients in the future to meet the continual demand. Vera Jones headed back to her desk and began the detailed performance analysis task. TABLE 1 CEO Daily Scorecard (4 Months into Financial Year; Actuals Reflect Year/Month-to-Date) Panel A: Emergency Indicators TimeSpentinEmergencyDepartmentLessthan4hours(allattendees)Lessthan4hours(tobeadmitted)Lessthan4hours(notadmitted)Greaterthan24hoursTriageseenintime90%080%Target70%99%086%Actual94%89% Panel B: Elective Indicators a \begin{tabular}{lrrr} Patient Admission Rates & Target & Actual \\ \cline { 4 - 4 } Category 1 Patients admitted (